ABA Health eSource
July 2010 Volume 6 Number 11

Health Reform Act Contains New Requirements for Tax Exempt Hospitals

By James Saling, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Jackson, MS

AuthorThe Patient Protection and Affordable Health Care Act (“PPACA”) 1 , as amended by the Health Care and Education Reform Act 2 , contains four new requirements for tax exempt hospitals. 3 A tax exempt hospital must now: 1) implement financial assistance and emergency care policies and programs and notify patients of the same; 2) restrict charges of uninsured and indigent patients to the amounts charged to insured patients; 3) restrict extraordinary collection actions until the hospital has made reasonable efforts to determine whether the individual is eligible for financial assistance; and 4) conduct a community health needs assessment (“CHNA”) at least once every three years. 4 These new requirements are embodied in Section 501(r) of the Internal Revenue Code. 5

In order to preserve its status as a 501(c)(3) tax exempt organization, a hospital should promptly adopt and implement, at a minimum, the required procedures relating to financial assistance, limitations on charges and collection processes. 6 A hospital is given an additional two years to adopt and implement a CHNA. Compliance is essential as the penalties for noncompliance can be severe, including revocation of exempt status and excise tax penalties.

1. Definition of a Hospital

The new requirements only apply to organizations that operate a facility required to be licensed, registered, or similarly recognized as a hospital, and to any other organization that the Treasury Secretary determines has the provision of hospital care as its principal function or purpose constituting the basis for its tax exemption. 7 Section 501(r) applies separately to each hospital facility operated by an entity.

2. The New Requirements

a. Financial Assistance Policy
Tax exempt hospitals must adopt a financial assistance policy and a policy relating to emergency medical care. 8 The financial assistance policy must include: (1) eligibility criteria for financial assistance and whether the assistance includes free or discounted care; (2) the basis for calculating amounts charged to patients and the method/process a patient would use to apply for financial assistance; (3) in the case of an organization that does not have a separate billing and collection policy, the actions the organization may take in the event of nonpayment including collections action and reporting to credit agencies; and (4) measures to widely publicize the policy within the community to be served by the organization.

A tax exempt hospital must also have a written policy requiring the hospital to provide care for emergency medical conditions to individuals without discrimination and regardless of their ability to pay. 9 Most hospitals already have these policies as required by the Emergency Medical Treatment and Active Labor Act; 10 however hospitals should review their policies to ensure that the above elements are incorporated.

b. Limitation on Charges
Tax exempt hospitals must now limit the amount charged to patients eligible for assistance under the hospital policy to not more than the amount generally billed to insured patients. 11 A hospital may not use gross charges when billing individuals who qualify for financial assistance (i.e., no chargemaster rates). 12 Hospitals generally have methods to charge less than chargemaster rates for patients receiving partial financial assistance, but they should review their methods to ensure compliance with Section 501(r) requirements.

c. Billing and Collections
PPACA also requires that a hospital forego extraordinary collection actions against an individual, even if otherwise permitted by law, without first making reasonable efforts to determine whether the individual is eligible for assistance under its financial assistance policy. 13  The legislative history provides that lawsuits, liens, arrests and body attachments are examples of extraordinary collection actions. 14

d. Community Health Needs Assessment
A tax exempt hospital must conduct a community health needs assessment every three years and adopt an implementation strategy to meet the community health needs identified through the assessment. 15 The CHNA must take into account input from persons who represent the broad interests of the community served by the hospital facility and must be made widely available to the public. 16 If a tax exempt hospital does not conduct the CHNA, Section 4959 imposes an excise tax penalty of $50,000. 17

A hospital is also required to report on its Form 990 annual return a description of how the organization is addressing the needs indentified in each CHNA conducted under Section 501(r)(3) and a description of any needs that are not being addressed, along with the reasons why the needs are not being addressed. 18  

3. Guidance From the IRS and Notice 2010-39

The IRS released Notice 2010-39 on June 14, 2010, which addresses the IRS's role in providing guidance as to the implementation of the new requirements for tax exempt hospitals. The notice is primarily a request for comments, 19 however it does suggest that the IRS will be influenced by the Technical Explanation from the Joint Committee on Tax. 20 The notice incorporates the following comments from the Technical Explanation: 1) the CHNA may be based on current information collected by a public health agency or non-profit organizations and may be conducted together with one or more organizations, including related organizations, 21 2) with respect to limitation on charges, it is intended that amounts billed to those who qualify for financial assistance may be based on either the best, or an average of the three best, negotiated commercial rates, or Medicare rates; 22 and 3) the definition of "reasonable efforts" as it relates to the hospital's eligibility determination for financial assistance "includes notification by the hospital of its financial assistance policy upon admission and telephone calls, before collection action or reporting to credit agencies is initiated." 23

4. Conclusion

While PPACA did not radically change the requirements for tax exempt hospitals to maintain or obtain federal income tax exemption, hospitals should promptly adopt and implement, at a minimum, the required procedures relating to financial assistance, limitations on charges and collection processes. Hospitals should also begin preparations for a CHNA to be conducted within three years. Further, as the IRS develops guidance for implementation of the new requirements, hospitals should be mindful that their financial assistance and billing policies and practices and CHNA methods may need additional reflection and revision.

1 Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (2010).
2 Health Care and Education Reform Act of 2010, Pub. L. No. 111-152 (2010).
3 This is just one development in a recent barrage on tax exempt hospitals, including the IRS’s expanded reporting requirements in Form 990 and the various state challenges of property tax exemption for tax exempt hospitals.
4 26 U.S.C. § 501(r).
5 Id.
6 These requirements are effective now for hospitals with tax years beginning April, May or June and will be effective for the many hospitals whose tax years begin in July.
7 26 U.S.C. § 501(r)(2).
8 26 U.S.C. § 501(r)(4).
9 26 U.S.C. § 501(r)(4)(B).
10 42 U.S.C. § 1395dd.
11 26 U.S.C. § 501(r)(5)(A). This pertains to patients who qualify for partial financial assistance and are responsible for part of the bill.
12 26 U.S.C. § 501(r)(5)(B).
13 26 U.S.C. § 501(r)(6).
14 Joint Committee on Taxation’s Technical Explanation of the “Patient Protection and Affordable Care Act” (the “Technical Explanation”) as amended (JCX-18-10), March 21, 2010.
15 26 U.S.C. § 501(r)(3).
16 Id.
17 Pub. L. No. 111-148, Sec. 4959.
18 26 U.S.C. § 6033(b)(15)(A).
19 Comments must be received by July 22, 2010. The IRS specifically requests comments with respect to CHNA requirement, the definition of “reasonable efforts” to determine eligibility for financial assistance, and the definition of hospital organization.
20 Joint Committee on Taxation’s Technical Explanation of the “Patient Protection and Affordable Care Act” as amended (JCX-18-10), March 21, 2010. The Technical Explanation contains a description and explanation of a number of provisions in PPACA, including those affecting tax exempt hospitals.
21 Technical Explanation at 81.
22 Technical Explanation at 82.
23 Id.

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